Ladies and gentlemen, thank you for standing by, and welcome to the Prudential Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. If you should require assistance during the call, please press star then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Darren Arida. Please go ahead, sir.
Thank you, Roxanne. Good morning, and thank you for joining our call to discuss Prudential's definitive agreement to acquire Assurance IQ, Inc. Representing Prudential on today's call are Charlie Lowrey, Chairman and CEO, Rob Falzon, Vice Chairman, Andy Sullivan, our next head of U.S. businesses, and Ken Tanji, Chief Financial Officer. Representing Assurance on today's call are co-founders Michael Rowell, CEO, and Michael Paulus, President. We will start with prepared remarks by Charlie, Andy, and Michael Rowell. Then we will take your questions. I would kindly ask that you keep your questions related to the transaction. Today's presentation may include forward-looking statements. It is possible that actual results may differ materially from the predictions we make today.
For a discussion of factors that could cause actual results to differ materially from those in the forward-looking statements, please see the slide titled forward-looking statements in today's presentation, which can be found on our website at investor.prudential.com. In addition, this presentation may include references to non-GAAP measures. For historical periods, reconciliations of such measures to the comparable GAAP measures can be found in our quarterly financial supplements, which are also available on our website at investor.prudential.com. With that, I will hand it over to Charlie.
Thank you, Darren. Good morning, everyone, and thank you for joining us today. Earlier this morning, Prudential announced the acquisition of Assurance IQ, a leading online and agent-assisted consumer solutions platform for people seeking personalized financial wellness needs across products including life, health, and auto. This is an exciting moment for both companies and an important next chapter in our strategy to serve a broader range of customers as the leading provider of financial wellness solutions. At a high level, this acquisition is a compelling investment for three primary reasons. First, Assurance is a fast-growing, highly scalable business model that brings deep technology capabilities and a new, more flexible and variable cost workforce model. Second, this acquisition significantly accelerates our U.S. financial wellness strategy. Assurance will add a large and rapidly growing direct-to-consumer channel to Prudential's platform, allowing us to reach the underserved mass market with financial wellness solutions.
Third, this acquisition offers attractive financial benefits with significant upside potential. Assurance represents a new earning stream for us that is not sensitive to equity markets, interest rates, or credit. We expect it to be modestly accretive to EPS and ROE starting in 2020 and will enhance Prudential's long-term growth profile. We also expect additional value creation from adding our products to the platform, leveraging their technology within the Prudential platform, and over time, expanding the Assurance business model internationally. As shown on slide three, I'll provide a quick overview of the terms of the deal. We are purchasing Assurance for $2.35 billion in upfront consideration. This will be funded through a mix of cash on hand, debt financing, and equity. Prudential's board of directors has authorized a $500 million increase to its share repurchase authorization for calendar year 2019.
This will offset the equity issued as part of the upfront consideration. As a result, the share repurchase authorization for the full year 2019 is $2.5 billion. As of June 30th, Prudential had repurchased $1 billion of shares of its common stock under this authorization. We expect to fully utilize the share repurchase authorization by the end of 2019. The Assurance team also has the opportunity to earn up to an additional $1.15 billion, contingent on reaching certain performance targets between 2020 and the end of 2022. Turning to slide four, Michael Rowell and Michael Paulus are impressive leaders, and they have built a world-class team. They have a track record for driving growth and innovation, and we greatly respect the business model they have pioneered. Now turning to slide five.
More importantly, in Assurance we have found a partner that shares our purpose to solve the financial challenges of our changing world. We've had the opportunity to spend a lot of time with Mike and Mike and other members of their executive team over the past few months. Right from the start, there was an alignment of vision, it quickly became clear that there is great potential in partnering together. They built Assurance from the ground up on the premise of protecting and improving the personal and financial health of all consumers. This shared vision gives us confidence in the strong strategic as well as cultural fit between both companies, an important consideration in the success of any acquisition.
I'm pleased to say that Mike and Mike are heavily invested in the long-term success of both Assurance and Prudential, underscored by the equity portion of the initial purchase consideration as well as the significant equity portion of the earn-out incentive. My team and I are confident that this acquisition, which we expect to close early in the fourth quarter of this year, will create significant long-term value for our company and our shareholders. Assurance is a fast-growing business with a substantial and long-term runway for expansion in the U.S., as well as internationally over time. We see clear opportunities to further accelerate their growth trajectory with our products and capabilities, we see many opportunities to leverage their capabilities to create an ecosystem together that will enhance our long-term growth profile.
I'd now like to turn the conversation and call over to Andy Sullivan and Michael Rowell, CEO and co-founder of Assurance. Andy?
Thank you, Charlie, good morning, everyone. Turning to slide six. I am excited to talk with all of you today about Assurance and how it will help accelerate our financial wellness strategy. As we've discussed in the past, financial wellness is a compelling opportunity for Prudential. Our business mix, capabilities, and strategy put us in an enviable position to deliver a comprehensive range of solutions, education, and advice for people with a variety of financial wellness needs. The acquisition of Assurance, a fast-growing and highly scalable consumer solutions platform, accelerates our ability to reach and engage a critical market directly with the products and capabilities we both have to offer. Assurance CEO Mike Rowell will discuss the business model and opportunity in greater detail.
I'll come back to talk about how this acquisition accelerates our financial wellness strategy and delivers attractive financial benefits and potential upside for our company and for our shareholders. Mike Rowell and his co-founder, Mike Paulus, are terrific leaders, and we're thrilled that they're joining Prudential along with the full Assurance team. I'll now hand the call over to Mike Rowell.
Thank you, Andy. We're excited to be here this morning and to talk about our future with Prudential. In creating Assurance, our goal was to transform the consumer experience for people seeking health and financial wellness products. We wanted it to be intuitive, highly personalized, and most importantly, relevant to a broad range of people in needs across the socioeconomic spectrum, with a significant focus on the underserved mass market. Turning to slide seven. Our innovative digital engagement platform orchestrates a highly personalized consumer journey. The customer journey begins by attracting consumers to our digital platform, which we achieve through targeted digital advertising and affinity marketing to highly trafficked web domains in relevant product categories such as life, health, and auto insurance.
Once a visitor to our platform provides details on themselves and what they are looking for, we build a picture of the customer that is assigned to one of more than 50 cohorts or buyer groups. This near instantaneous segmentation, which is achieved using machine learning and third-party data, allows us to produce real-time, personalized product recommendations to our customers, customized to their needs. We currently have approximately 19 million people who are actively engaged on our platform, and the numbers continue to grow each month. Because of the advantages of machine learning, every new interaction that comes with deeper engagement helps to make our recommendations smarter and the customer's journey better. The final step in the process is where humans come in and make our customer journey unique.
People are increasingly comfortable researching important purchases like life and health insurance online, but they still overwhelmingly prefer to make their final decision with the help of an expert. We address this preference by using algorithms to connect the customer in real-time to live digital guides and then licensed agents who are determined to be the best match to walk an individual through their recommended solution set, answering questions and assisting them with an online purchase. Turning to slide eight. Our model is built customer in, meaning that the business model puts the customer's needs at the center. The platform we built combines data science and a human touch in the form of expert agents to help consumers research, find, and ultimately purchase health and financial wellness solutions that are tailored to their needs. These agents are available seven days a week, which enhances the overall customer experience.
Our unique approach helps us by eliminating the inefficiencies of conventional models and lowers the cost of customer acquisition. We are able to serve all customers more effectively, regardless of demographic status, while at the same time delivering a superior experience with a human touch and personalizing details, leading to the right solution. Data science is often applied to help companies with operational efficiencies, but at Assurance, we also apply these technologies to improve outcomes and experiences for the consumer. Shown on slide nine, we are particularly proud of our assisted agent model and the tools and support network we have created to help them succeed. These include dashboards with real-time information that helps answer customer questions, as well as access to a smaller network of Assurance subject matter experts who can provide further customer assistance when needed.
The agents that we partner with work remotely on their own hours and on commission, an arrangement which allows us to maintain a variable cost model that we can scale up and down based on demand. These agents benefit from a flexible schedule and entrepreneurial opportunity where they can focus their skills on helping customers as opposed to prospecting. This leads to much higher agent productivity as well as better outcomes for the customer and strong Net Promoter Score. Mike and I have thought a lot about how we expand in a way that preserves the Assurance customer experience and keeps us connected to our purpose of improving personal and financial health. We knew that we wanted to find the right partner, and our growth roadmap led us to Prudential.
In combining with Prudential, we gain a growing product suite and access to new markets and institutional expertise. Our combined capabilities create an end-to-end customer engagement model that serves more people with a broader range of solutions available in the manner that they prefer. It's an exciting next chapter for us. With that, I'll turn it back to Andy.
Thanks, Mike. Let's turn to slide 10. Assurance helps us significantly accelerate our U.S. financial wellness strategy. Turning to slide 11, at our Investor Day in June, we talked about our growth opportunity for financial wellness in three customer areas. Overall, we see a significant unmet need where individuals are not currently being served through the traditional financial channels. We have been prioritizing our capabilities accordingly. First, we talked about winning and retaining institutional clients in retirement and group insurance. Second, we talked about serving individuals within those institutions where there's an opportunity to increase utilization of our savings and benefit programs offered to employees. Third, we talked about a significant long-term opportunity for Prudential to provide more individuals with retail solutions that address a broader range of financial wellness needs.
Today, the acquisition of Assurance allows us to accelerate our strategy to expand to direct and deeper engagement with individuals so that we can capitalize on this opportunity now. As shown on slide 12, Assurance deepens and strengthens our platform for serving individuals with additional financial wellness solutions. Together, Prudential and Assurance will create an end-to-end engagement model for financial wellness. Assurance adds to our existing solution set with health insurance, Medicare, and auto insurance. Assurance expands the ways we serve and engage with a highly successful and fast-growing direct-to-consumer marketplace. It strengthens and advances our sales model by adding currently more than 3,000 on-demand agents who are enabled by technology. This variable cost model has quickly scaled to serve a growing base of customers across the United States.
We've said that financial wellness for us means helping people to take action to achieve progress in foundational elements of their financial security. For this financial wellness vision to work, we must offer the solutions that people need, engage with them in the way they prefer, and create an experience that's holistic, seamless, and personalized. Now turning to slide 13. Assurance helps us deliver on this vision faster and for a much larger addressable market. We know that there are large middle market and mass affluent customer segments that have been traditionally underserved. We've been reaching a portion of those customers today through our workplace businesses. Today, Assurance is accelerating this strategy by bringing approximately 17 million individuals who are actively seeking insurance solutions. This number is expected to grow quickly. Together, Assurance and Prudential could serve a fuller range of demographics, more people along the socioeconomic spectrum.
We can engage with them in more ways. As Prudential introduces expanded product options and advice capabilities, we will have the platform to offer a more comprehensive range of financial wellness solutions to meet people's specific needs. As shown on slide 14, together, Prudential and Assurance will create a fast-growing ecosystem, one that we believe has significant runway for expansion and will enhance our long-term growth profile. We will be able to offer customized solutions enabled by advanced data science and human touch, drawn from a broad offering inclusive of Prudential and third-party providers, supported by an end-to-end engagement model with on-demand live agent service. This will enable better, simpler experience for the customer, leading to improved engagement and outcomes. We believe this is a winning proposition in a market where demand is outpacing what the industry currently has to offer. Turning to slide 15.
As a result, we expect this acquisition to deliver attractive financial benefits for our company and for our shareholders. On slide 16, we highlight the immediate value creation by this transaction. As Charlie mentioned earlier in the call, we expect the acquisition to be modestly accretive to EPS and ROE. We expect it to be accretive to EPS by approximately $0.10 in 2020 and $0.30-$0.35 in 2021, with significant growth in revenues and attractive returns. The EPS accretion assumes some cost synergies and minimal revenue synergies. We expect to generate cost synergies of $25 million-$50 million in 2020, increasing to $50 million-$100 million by 2022 as we leverage Assurance's scalable model and advanced data science capabilities. These synergies are incremental to the $500 million margin expansion provided at our recent June Investor Day.
This acquisition will add a low fixed cost, capital light, and high margin model, which will support a free cash flow conversion ratio above the company's current ratio of 65% over time. Assurance will add a new earnings stream to Prudential that's not sensitive to equity markets, interest rates, and credit. These financial results will be reported as a separate segment. We hope this transparency makes it easier to model our financials and to track our progress. Now turning to slide 17. We see significant upside to our accretion expectations from revenue synergies and additional opportunities for efficiency that have not been assumed in the financial impacts previously highlighted. We have a clear roadmap for increasing Assurance's growth by adding Prudential products to their existing open architecture marketplace and by helping them expand internationally over time. Assurance also offers us the opportunity to deepen our relationship with Prudential's customers.
We can leverage their innovative advanced analytics technologies and assisted agent service model and offer a broader solution set to existing Prudential customers. We can accelerate our usage of these analytics to increase our operational speed and productivity to make it easier for our employees to focus on higher value-added activities. In summary, we are excited about Assurance becoming a part of Prudential. It's a fast-growing, highly scalable model. We will further accelerate our U.S. financial wellness strategy, and this will generate attractive financial benefits with upside potential. Operator, we'd now like to turn the call over to Q&A.
Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star then one. You'll hear a tone indicating that you've been placed in queue. You may remove yourself from queue at any time by pressing the pound key. Once again, if you have any questions or comments, please press star then one, and please limit yourself to one question and one follow-up. Our first question comes from the line of John Nadel, UBS. Please go ahead.
Good morning. I guess if I was going to start someplace, I'd start here. The 11x EBITDA multiple that you highlight on slide 16, does that assume the earn-out? What are the targets that would generate the full earn-out, and what's the composition of that earn-out if it is indeed earned?
This is Ken. Hey, John. In terms of the 11x multiple, that's assuming our base case. The way you can think of that is in about two years, we expect annual revenue to be about $1 billion, with operating margins better than 20%. You can think of the EBITDA that that generates relative to the $2.35 billion purchase price is about 11x EBITDA multiple, and we think that compares quite favorably to comparable tech-focused platforms or insurance brokers. We believe Assurance is much better positioned for growth and success, again, to the uniqueness of their business model, which is proven to be successful, and it brings us new capabilities. Beyond that, we expect robust growth to continue beyond year two.
Again, it doesn't include the upside of offering our life and annuities and investment solutions on their platforms over time, nor does it factor in much in terms of referring our customers to their platform or launching this business model in international markets. Overall, we think the purchase price was fair and attractive and based upon our base case valuation.
But just to follow up, Ken, is the base case assuming any portion of the earn-out?
No. No, it doesn't. To the extent that variable profits over the first three years exceeds $900 million, we will begin to pay an earn-out up to variable profits of $1.3 billion. After that, all of the upside belongs to Prudential. We think the earn-out makes sense. It aligns our interest for the management team to reach those levels. If we do, and we hope we pay an earn-out, our returns will look better.
I have a number of questions, I'll limit it to two, I'll just do my follow-up. I don't want to get overly personal here, how much are the co-founders making personally in this transaction? Assuming this is a very significant payday for both of them, what gives you confidence, Charlie, that they'll have the same kind of motivation to continue to manage and grow this business over the intermediate to long term as part of Pru?
Hey, John, it's Charlie. I'll answer that in a couple of ways. One, obviously, the earn-out is there, the earn-out's substantial, and the earn-out was intentional. They have a real incentive to stay to earn that earn-out. Secondly, part of the earn-out goes to the existing employee base, and the two Mikes have been generous in that. There's a retention factor there as well. The second thing I will say, it's softer and this is under the sort of prove it to me if I were you, but if you get to know Mike and Mike over time, you will see that they share our real passion in the vision that we have to create products for the mass market and to expand financial solutions and financial wellness to a much broader population, both here and internationally. They chose us because of that shared vision.
The confluence of that vision, we think, leads us both to working together for a long period of time. That's the soft side of it. We spent a great deal of time talking about that, and are convinced on both sides that we chose the right partner and that we have a lot of work to do in order to manifest our visions, and we're going to be hard at work at it.
Just real quick, was this an auction process or were you guys involved directly in conversations with Assurance here? How long was the process?
The process was over many, many months. What I will say is that Assurance had a lot of choices, and we were delighted that they chose us.
Thank you very much. Good luck.
Our next question comes from the line of Jimmy Bhullar, J.P. Morgan. Please go ahead.
Hi, good morning. I guess the sort of strategic logic of the deal is fairly apparent, I had a couple of questions on just the financial aspects of it. It seems like most of the buyback and actually more than what you're outlining as accretion from the deal is coming just from the buying back of the $500 million. If it wasn't for that, the deal would actually be fairly diluted. What's the logic of including that $500 million of extra buybacks in the math on the deal? Because that's something that you could have done anyway, right? Was there something precluding you from doing that? Why is it being tied to the deal itself?
Yeah, Jimmy, no, the idea of increasing our share repurchase program by $500 million was essentially to offset the shares that are being issued as part of the purchase price. We thought having shares as consideration for the purchase price, which are locked up for 3 years, was important not just to us, but to the Assurance team as well, that we would be fully aligned with our common objectives. Making that part of the arrangement, we increased the buyback to offset the dilution, that's so that the buybacks aren't factored into the accretion numbers that we cite.
Is this increased buyback in any way sort of front-ending the buybacks that you would have done next year? This doesn't affect your plans for capital deployment beyond this year?
I think the way Jimmy should think about this is this leaves our share repurchases on a net basis unchanged from our authorization originally from this year. We increased it by $500 to $2.5. We'll be issuing $500 million as part of this transaction, on a net basis, $2 billion and unchanged from our original intentions for the year.
Just lastly on the additional products that this brings to your platform, how much of a sort of ramp-up do you expect in those types of products now that Assurance, it's part of a larger franchise and you've obviously got other distribution that complements what you're getting through this deal? How much of a pickup in growth do you expect on the company that you're buying? Or is it going to be fairly steady with what it would have grown anyway because it's a separate division?
Jimmy, it's Andy. Maybe I'll start with the base case is predominantly squarely upon what the company was going to grow in and of itself. As I mentioned in my prepared remarks, we do believe that because of our other mix of businesses, we're going to accelerate the growth that they would have seen otherwise. In particular, the scope and scale of our workplace businesses, where we've been already leaning in on broadening out the solution set to those 20 million individuals. We now have a very low friction capability to bring a broader solution set, so the medical product offerings, the auto, the home, those type product offerings to those customers. Obviously as well, the opportunity to expand this into international markets.
While the base case is squarely on what Assurance as a company intended to grow in and of itself, we do believe that we will accelerate that over time.
Okay. Thank you.
Our next question comes from the line of Tom Gallagher, Evercore. Please go ahead.
Good morning. First question, just on the $700 million of revenues assumed for 2020, how does that compare to the current run rate of revenues? What kind of growth has Assurance been seeing? Like, is the 40-some odd % growth that you're estimating between 2020 and 2021 a deceleration, an acceleration?
Yeah, Tom, I can take that question. It's Mike Rowell here. Revenues for 2019, we are targeting a little under $500 million of revenue for this year.
How did that compare to 2018?
2018 was about $120 million.
Got it. This is really, we're seeing exceptional growth on a run rate basis. I guess my question is, it's a little more longer term strategic, what's been driving the exceptional growth? Has it been adding a lot new insurance providers to the platform that are selling products? Is it the type of products that have been sold have been expanded. Would you expect that these revenue targets are pretty easily achievable based on the trajectory here?
We feel very confident in these revenue targets. I'll add to that the driver of the growth has really been consumer demand, which has continued to significantly grow on our platform. There's significant opportunity for adding additional solutions to the platform in order to capitalize on all of the consumer demand that's there.
To your point around lines of insurance, I think what we've seen is we've had a unique business model that's resonating with customers. Assurance was profitable from a very early point in our history, and we've been able to both grow market share in the lines of insurance that we've been in longer, and we've also proven our ability to enter new lines of insurance with the model and have success.
Tom, it's Andy. Maybe one thing I would just add from my perspective about the model. Mike and Mike and their team have had a zealous focus on removing friction in the shopping and the buying process. They have quite literally applied data science to every step of that process. From that focus and from that better shopping experience and reduced friction, that's been a key secret to the acceleration and the growth along with what Mike and Mike have shared.
Got it. That's helpful. Just one final follow-up, if I could. Charlie, you mentioned in the slide, it's mentioned that this should, I think, significantly lower acquisition costs over time. If there's an agent being used in most transactions here, presumably they're still being paid a similar commission. How exactly would that lower acquisition expenses?
Well, I'll take a first crack at it, and then somebody can either clarify or correct me. The beauty of the Assurance model is that these are independent agents. If you think that an agent does three things, right? He prospects, presents, and closes. What Assurance does is eliminate the prospecting by the way they attract customers, and then through data science, analyze those customers and then assign them to an appropriate agent. That way, all the agent has to do is to present recommendations and then close. Therefore, the agents can be highly efficient and much more productive. That's one of the beauties of the model, is that it eliminates all the prospecting time, if you will, and makes the agents much more efficient. That's one of the ways in which you get the cost down.
Yeah. I'll add to Charlie's statement. This is Mike Rowell here. The platform that we've built truly integrates data science throughout the entire process. Every consumer, as they enter the process, we try and move them as far digitally as possible. Then, when it makes sense, we have them interact with an agent. If you look at the role of the agent, we've really split it into two different parts. There's this quantitative aspect that we felt models did a much better job of addressing. Then there's the soft part of the agent where they can really focus on that relationship with the consumer. The end result of that is that agents are far more productive.
What it's enabled within our model is that on a per policy basis or per product basis, we can pay the agent far less on our model. However, because of significant productivity, their earning opportunity on our platform is significantly higher than they can find elsewhere.
That makes perfect sense. It would be lower commissions, if I'm hearing you all correctly. Okay. Thank you.
Lower commissions, but with much higher productivity.
Makes sense. Thanks.
Our next question is from Alex Scott, Goldman Sachs. Please go ahead. Alex Scott, your line is open for your question.
Hey, sorry about that. Good morning. First question I had was just on the EBITDA margin. I think you mentioned it was around 20%. I guess my question is just how scalable would you expect this to be? Where do you think that margin could get to over time?
Yeah. The margin is very solid. 20% is a very healthy margin. Although that can maybe have some room to improve, their earnings growth will more come from volume and attraction of customers than necessarily margin expansion.
Yeah. One thing I would add is there are some flywheel and network effects in the business. As we grow, we have more customers and more agents, so we can more effectively match the right customer to the right agent. We can bring more products on, so we have a better product for each customer. We have more opportunities to learn from the data to improve the engagement outcome for people.
Got it. I guess just my follow-up to that would be, the revenue growth you're talking about is large. I would assume there's probably significant agent headcount increases that are associated with that. I'd just be interested in any color on your process there. How successful you guys have been in being able to add that kind of headcount in a quick time period.
Yeah. Two things to add there is, agents play a key role in our business. We consider them one of our customers. As a result, we have a deep focus on improving the experience for them. What that has led to is significant productivity gains over time, meaning that the average number of policies that an agent can sell on our platform continues to increase on our system. The second thing I would add is just that agents are very much attracted to the platform, we've had a very positive response with significant agents reaching out, wanting to get on.
The unique model means that we have agents in all 50 states. It's a very diverse agent base. Our youngest agent is 18, and our oldest is 83 on the platform. I think the other key piece, as Charlie alluded to earlier, was we're really taking away the biggest pain point and the biggest reason why agents don't find success in this business, which is prospecting.
Got it. Okay, that's really helpful. Maybe if I could sneak in one last one just on the overall financial wellness investment cost save strategy. I think, in the past, you guys have showed a range of investment that may be needed. I mean, does this transaction change at all where you might come out on that spectrum? Just thinking through if there's investment synergies coming from this deal, maybe you don't have to do quite as much as you had originally planned. I mean, is that the right way to think about it?
Yeah, Alex, it's Andy. The cost saves that I talked about in my prepared remarks, the $25 million-$50 million and the $50 million-$100 million, a good portion of those cost saves are builds that we had underway that we don't need to do anymore because Assurance actually brings the capabilities to us. That's not certainly all the components that'll produce the cost saves, but directly to your question, there are capabilities that Assurance is bringing day one that we were either underway building or had intended to build as part of our three-year plan. Now we do not need to do that.
Got it.
We will obviously have some one-time deal related expenses associated with the transaction, which we'll record as we close the transaction.
Okay. Any sense of how large those would be?
Roughly $30 million.
Okay. Thanks very much.
Our next question comes from the line of John Barnidge, Sandler O'Neill. Please go ahead.
Yeah, sorry. Could you please talk about your plans to export Assurance IQ's capabilities internationally, please?
Sure. Happy to do that. It's Charlie. The first priority is to concentrate on expanding quickly in the U.S. That's job one, day one. When we ultimately consider international markets, we and Assurance will look at both the developed and the emerging markets and evaluate where Assurance's capabilities could be most effective. For example, in developed markets, it may be that the opportunity is the same in the U.S., right? Creating a robust platform or ecosystem of products that can be marketed to the mass market. On the other hand, for emerging markets, given the lower premium amounts, it may be that we leverage their model to reach a wider range of potential customers at all levels with a slightly different product set. We'll evaluate opportunities when we're ready, but the first priority is to continue to grow in the U.S.
Okay, my follow-up, what is the length of the contracts behind the relationships Assurance IQ already has with its product partners?
Yeah. We are currently not on the platform. There's a few other providers of life insurance on the platform. That contract extends into next year. That's the general length of the life insurance piece.
Just to give you a little bit of flavor across the board, we have more than 20 providers on the platform. To highlight some well-known providers, Humana, Chubb, Aetna, UnitedHealth, amongst others.
Okay, great. Is there any seasonality you can speak to? I know that it's been fast-growing, it may be hard to actually identify.
Certainly Q4, because of the healthcare enrollment periods that are there, certainly increases during that time period.
Thank you for the answers.
Our next question is from Elyse Greenspan, Wells Fargo. Please go ahead.
Hi, good morning. My first question, just picking up on the revenue side. You guys mentioned there's 20 providers on the platform. I was just wondering if when you do your.
Do you view any of these, I guess, as being competitors where you might kind of lose some relationships now that you guys are owned by Prudential?
We don't. We believe our partners will be very excited by this. We continue with an open architecture model, and we think that Prudential supports us continuing to build out solutions with the existing partners as well as new ones to come.
Elyse, this is Andy. I guess two things I'd add. One is, as we talked about, we see this and we see evidence in the business model and with the results that have been produced of this is tapping into an underserved segment of the market, which is creating greater volumes for all. We think that the degree of volumes running through the platform will remain very attractive to all providers, even those that might consider Prudential as a competitor. The other thing is this is an open architecture type of a business where Assurance guides consumers to solutions, and there needs to be a degree of choice around that. That number of providers, ask Mike and Mike, but likely will continue to grow as we add new solutions and different products.
The one other thing I would add, not to pile on, but that most of these products we're not in, right? We don't view these folks as competitors, nor would they necessarily view us as a competitor.
Okay, that's helpful. In terms of the revenue synergies, I know this has come up throughout the call. You guys obviously pointing to being able to sell Prudential products on this platform and just expanding your reach. It doesn't sound like you really want to put a number on the revenue synergies, but if you can kind of, I don't know, ballpark it or talk a little bit more, then give us a sense in terms of timeframe, like when can those revenue synergies start coming into your numbers?
Yeah. This is Ken. We didn't factor in a lot of revenue synergies near term. As Charlie mentioned, job 1 is to execute on their existing business model and continue on the trajectory that they're on to get to that scale that's possible. We prioritize revenue synergies second. Those will come in later out. We'd rather not put a number on that right now.
It's Charlie. Those are all outside anyway. They weren't factored into our base case per se. Therefore, we will develop those over time and add them when appropriate.
Okay, one last question. Is it possible to get the mix of revenue between life, health, and auto as it kind of sits today?
It's a good representation by the three largest kind of product categories of life, health, and Medicare. It's fairly evenly distributed. Over time, revenues by product will change as the company grows auto and other products that we add to the platform.
Okay, that's helpful. Thank you very much.
Our next question is from the line of Mark Dwelle, RBC Capital Markets. Please go ahead.
Yeah. Elyse actually asked a number of the questions I had. I guess it's your intention that you will offer now on the platform, whereas you had not been previously. Is that right?
Yes. This is Andy. Obviously, we have some really deep manufacturing capabilities in life and in guaranteed income. We will begin offering our solutions as part of the solution set on the platform. One of the things we're most excited about is, as I talked about, really utilizing Assurance's data science capabilities and understanding of the consumer, combined with our product manufacturing in life and guaranteed income to produce solutions that, I'll use the word, are more tuned to the exact need. We think we'll get lift for us out of that.
Obviously, you already have your own face-to-face advisors. Is there going to be an opportunity for them to utilize this tool in their relationships, or is this going to be a completely separate parallel channel?
No. We actually, you may have heard us talk about our advice continuum before. We see these capabilities as completely complementary. We already, as we were on our financial wellness journey, we're seeing the benefits of being able to, I'll use the word, refer customers to the best channel that they want it to solve. We always start with how does the consumer want to do it? Where do they want to do it? When do they want to do it? How do they want to do it? We will plug this capability into our Prudential advisor capability, and we believe there'll be times that we appropriately will have consumers go back and forth, and that'll be required based on what the solution set is we're trying to solve for them.
Okay, thanks. One last question. You alluded to the earn-out previously, that there was a potentially an equity component to that. Is that in the same proportion as the initial purchase allocation, or is it more or less equity heavy on the earn-out piece?
Yeah. The split on the earn-out is 75% will be in the form of Pru's stock and 25% in cash. We structured, again, the earn-out to incent the Assurance team to exceed our base case assumptions. The stock, again, further aligns our interest in that. That's the structure of the earn-out.
Okay, thanks. Those are my questions.
Our next question is from Joshua Shanker, Deutsche Bank. Please go ahead.
Thank you for taking my question. A couple of questions. One, in terms of the earnings of the business versus the cash flow, when you guys are booking a policy, is there a certain number of years that policy needs to stay in force for before any revenues that you would generate turn cash flow positive?
I'll talk to the cash flow. It's actually a highly cash flow generative business. The commissions are received from the insurers in a timely fashion, That keeps the cash flow quite high. After a period of growth, we would expect the free cash flow relative to after-tax earnings to be about 85%.
That period of how many years is that gap, I guess, that period of growth you're talking about?
I think about over the next couple of years. Sort of as they approach $1 billion of revenue, we then see a pretty healthy cash flow stream. They've been self-funded up until this point. Now they're going through a wrap, that speaks to the natural cash flow nature of it. They're going to go through some rapid growth, that cash flow will become fully coming through and again, at about a rate of 85% of after-tax earnings.
Thank you. The other question, can we just talk about the units of measurement that were used, I guess, when you met the company that they were using to gauge success? Was it growth in interactions? Was it revenues per customer? Can we talk a little bit about that last one, how revenues per customer has been tracking over time?
It's really been just revenue overall was, I think, kind of our primary discussion point. Number of interactions with consumers on the platform and the growth of those two components.
How has that latter one been scaling?
Very well. I don't have it in front of me, but it continues to grow at an excellent pace.
Okay. Thank you.
Our next question comes from the line of Randy Binner, FBR. Please go ahead.
Hey, good morning. I have some product questions just to follow up on some of the prior questions. In terms of what Prudential is going to manufacture now, it sounds like Medicare Supplement would be expected there. On the healthcare side, can you dimension for us what kind of major medical products you may manufacture? Are you just going to be more on the supplemental health side?
Yeah. Randy, it's Andy. Yeah, that is not the direction we're going. We have manufacturing expertise in life insurance and guaranteed income. Those ar the areas that we'll be working with Assurance to put those types of products into and onto the platform. As far as the other solution sets, the healthcare solutions that you mentioned, whether it be supplemental medical or Medicare Advantage or any of the PMC type solution sets, we will, in essence, be bringing those solutions to consumers. Participating in the distribution economics, we will not be going into manufacturing of those broader product lines.
Okay, great. Thanks for clarifying that. The follow-up question I have is, given the significant revenue ramp that Assurity is expecting in 2019 from 2018, it sounds like that's going to be through open enrollment period. Can you help us understand kind of what type of products are driving that, and if it is around open enrollment, kind of what changes you've made to your approach to open enrollment this year that you think would lead to much higher sales?
As we look at Q4 and the annual election period, I think the single product that we'll see the most growth in on a year-over-year basis is Medicare Advantage. Over the course of the past year, we've done a lot of work in terms of having a fully end-to-end digital capability for consumers to enroll in Medicare Advantage. We've grown out our ability to fulfill those Medicare Advantage sales ourselves, and we will also have a much larger Medicare Advantage agent force for this AP.
What about short-term limited benefit health or other forms of ACA-compliant health? Are you participating in the healthcare market as well, or just Med Advantage?
We have Medicare Advantage, Medicare Supplement, and we have a broad swath of under 65 health plans, both ACA and non-ACA options. Similarly, as you look at our Q4 this year, we've broadened out our carrier set, we've broadened out our digital capabilities, and you'll also have a significantly larger agent base.
The main thrust of your growth expectation is MA, Medicare Advantage.
It's both.
It's both. I think MA, just on a year-over-year basis, is the single product line that will see the most growth.
We continue to see growth on all product lines.
Okay. Thank you.
We have a question from the line of John Heagerty, Atlantic Equities. Please go ahead.
Thanks. Following up on the ramp-up questions, just wondering what the revenues were in the first half of 2019.
We don't.
Yeah. We're not going to break that down for you.
Okay. A quick follow-up. Just wondering how many employees there are rather than contractors. Presumably, all the agents are contractors.
Sure. There's roughly 120 full-time employees.
Okay. Thank you. Just last one. Your confidence levels around hitting the roughly $500 million of revenues in 2019?
We feel good.
Okay, thanks.
Our next question is from Humphrey Lee, Dowling & Partners. Please go ahead.
Morning, and thank you for taking my questions. Just to follow on kind of the revenue outlook trajectory. As I think about kind of your, I guess, the active user base on the platform right now of that 19 million, how many of those are actually buying a product as opposed to just using your platform for educational purposes? Then also to get to that $1 billion revenue target, how big would that customer base or user base have to grow over time?
Yeah. It's a good question. What I will say is that part of our reason behind seeking out a partner and landing on Prudential has been that the demand for solutions from customers on our platform kind of far exceeds the number of solutions that we have. By that I mean we can identify a significant number of consumers that we don't currently have a good solution for today. Part of this transaction really enables us to broaden our relationships with our existing partners, as well as onboard those products from Prudential in order to help with that.
Maybe just to give a little bit more insight there, we have sold more than 300,000 policies to date. What we do see with our current customer base is that they are engaged, and when they come back to us a second or third time, they purchase at a higher and higher rate. As people become more familiar with us, they do purchase at a higher rate. We also do have millions of new customers coming in on a monthly basis. That base of users continues to grow rapidly.
Okay. Basically, the growth is not only supported by kind of the sheer size of the active users, but it's also by deeper penetration.
That is correct.
Okay. All right. Maybe a question for Charlie, also Mike can provide some insight too. I guess I understand the rationale behind how Pru and Assurance in terms of kind of corporate missions, how they align. Why picking Assurance IQ as the partner? Maybe Mike can share in terms of where you guys stand in terms of the market position or market share in the direct-to-consumer channel.
Let me take that first, Humphrey. We are always looking for interesting ideas and new ways of accessing customers, especially in the mass market. When we began talking to Assurance, we quickly realized that in many ways, they'd cracked the code that nobody else has cracked before, right? The way they use data science with a human touch, the way they focus on the customers, and the way they have structured their business model is such that we immediately saw the potential in their company and what they've done, not only because of the platform they've created, but quite frankly, because of the quality of the people in their firm and the vision that they have. When you combine all that together, we became more and more excited about where they were going and what we could do together in combination.
That's what led us to them. These things don't come along very often, and we think we found an extraordinary company here. We were very lucky to find them and very lucky that they chose to combine with us.
I guess, in terms of the Assurance market position or kind of share of the direct-to-consumer channel?
Sure. I can take that. I think maybe the way that I would answer it is really just bringing a little more understanding to our platform. You have an end-to-end customer engagement platform where we're product agnostic, and it really centers around the consumer. By that I mean we look at the consumers that are coming into our platform, and we not only look at the specific product that they came in looking for, but we're also looking at the characteristics of those consumers and what other products they need. Just that on its own will take us into significantly more product segments than what we're in today.
I think just looking at us for kind of the specific products that we're in today and kind of the specific direct-to-consumer model that is there kind of limits what the opportunity to really leverage the platform in many different ways than just what we're currently doing.
We really believe there's no other company that does everything that we do with data science guiding the end-to-end customer journey with a broad set of both product categories and products within those categories, and then the on-demand service supported by the unique variable cost agent model.
Thank you. Follow caller. Thanks.
I'll now turn the conference over to Charlie Lowrey for closing comments. Please go ahead.
Okay, thank you. In closing, I hope we've succeeded this morning in conveying the sense of excitement and conviction we feel about our acquisition of Assurance. Together, Assurance and Prudential have a unique opportunity to live our purpose and grow our business in a way that benefits our customers, our business partners, and our shareholders. Thank you all for your time today, and we look forward to having further conversations with you.
Ladies and gentlemen, that concludes our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.